FM300 Syllabus Section a 2012-13

5/28/2018 FM300 Syllabus Section a 2012-13

1/5

London School of Economics Department of FinanceMichaelmas Term 2012 Michela Verardo

FM300 Corporate Finance, Investments, and Financial Markets

Section AInvestments and Elements of International Finance

Course Description

This section of the course examines the empirical evidence on the behavior of stockprices from an investments perspective. After reviewing the essentials of portfoliotheory and asset pricing, we will examine empirical tests of asset pricing models andtheir practical applications in determining expected returns.

The course then focuses on market efficiency and return predictability. We will learnhow to conduct an event study, how to create a portfolio strategy based oninvestment anomalies, and how to interpret the evidence in the light of rational andbehavioral theories.

We will then examine the main models and methods of performance evaluation andattribution. After a brief overview of the main issues concerning the management ofbond portfolios, the last part of the course introduces elements of internationalfinance. Particular emphasis is given to issues related to international portfoliomanagement and hedging strategies.

Readings

The required textbook for this section of the course is:

Zvi Bodie, Alex Kane, and Alan Marcus, Investments and portfolio management,McGraw-Hill, 9th ed. (Please note: any other edition is fine).

The journal articles listed in the course outline are optional readings and theyare posted on Moodle. They can help you deepen your knowledge of specificissues you may be interested in. More suggestions will be given in eachlecture.


2/5

Course Outline

1. The Capital Asset Pricing Model: brief review and empiricalapplications Brief review of portfolio theory and the CAPM Basic rules of statistics and regression analysis Estimating betas and expected returns Applications of the CAPM

Readings:BKM Chapters 7, 8, 9, 13.1

2. Empirical tests of the CAPM and multifactor models Empirical tests of the CAPM Brief overview of multifactor models and empirical tests The Fama-French model

Readings:BKM Chapters 10, 13.2, 13.3

Optional readings:Fama, Eugene, and Kenneth French, 1992, The cross-section of expectedstock returns,Journal of Finance47, pp. 427-265.Fama, Eugene, and Kenneth French, 1993, Common risk factors in thereturns on stocks and bonds,Journal of Financial Economics 33, pp. 3-56.

3. Market efficiency: Empirical tests and evidence The three forms of market efficiency Are markets efficient? Tests of market efficiency and empirical

evidence

Technical analysis Event studies

Readings:BKM Chapters 11.1 11.4, 12.2

Optional readings:Fama, E., 1991, Efficient capital markets: II, Journal of Finance 46, 1575-

1617.


3/5

4. Investment anomalies and return predictability

Investment anomalies: size, value, momentum, post-earningsannouncement drift

Issues on data-mining The equity premium puzzle

Readings:BKM Chapter 11.4, 13.5

Optional readings:Schwert, W., 2003, Anomalies and market efficiency, Handbook of theEconomics and Finance, Ch. 15, 937-972.

Jegadeesh, N. and Titman S., 2001, Profitability of momentum strategies:

An evaluation of alternative explanations,Journal of Finance56, 699-720.La Porta, R., J. Lakonishok, A. Shleifer, and R. Vishny, 1997, Good newsfor value stocks: further evidence on market efficiency, Journal of Finance52, 859-874.Siegel, J., 1999, The shrinking equity premium, Journal of Portfolio

Management, 10-17

5. Behavioral Finance and limits to arbitrage

Behavioral biases Investment anomalies: underreaction and overreaction The disposition effect Costly arbitrage and short-sale constraints

Readings:BKM Chapter 12

Optional readings:Shleifer, A., and R. Vishny, 1997, The limits of arbitrage, Journal of

Finance52, 35-55.Shleifer, A., 2000, Inefficient markets: An introduction to behavioral finance,Clarendon Lectures in Economics, Oxford University Press, New York.Barber, B. and T. Odean, 2000, Trading is hazardous to your wealth: thecommon stock investment performance of individual investors,Journal ofFinance55, 773-806.T. Odean, 1998, Are investors reluctant to realize their losses?, Journal ofFinance53, 1775-1798.


4/5

6. Fixed-income portfolio management

Interest rate risk Duration and convexity Passive bond management, immunization, active bond

management

Readings:BKM Chapters 14, 15, 16

7. Active portfolio management and performance evaluation Measures of performance

Market timing Stock picking The Treynor-Black model Performance attribution procedures

Readings:BKM Chapters 24, 27.1, 27.2

Optional readings:Sharpe, W., 1992, Asset allocation: Management style and performance

measurement,Journal of Portfolio Management, Winter, 7-19.Carhart, M., 1997, On persistence in mutual fund performance, Journal ofFinance52, 57-82

8. Elements of International Finance International financial markets: Spot and forward exchange

markets, Interest rate parity

Exchange rate determination: Purchasing Power Parity, Forecastingexchange rates, International risk management

Readings: lecture notes.

Optional readings:Raman Uppal and Piet Sercu, International Financial Markets and the Firm,South-Western College Publishing, 1995.Adler, M., and B. Dumas, 1984, Exposure to currency risk: Definition andmeasurement, Financial Management.


5/5

9. International asset allocation

Exchange rate risk The world equity portfolio Benefits from international diversification The home equity bias

Readings:BKM Chapter 25

Optional readings:Michaud, R., G. Bergstrom, R. Frashure, and B. Wolahan, 1996, Twentyyears of international equity investing,Journal of Portfolio Management 23Eun, C., and B. Resnick, 1988, Exchange rate uncertainty, forward

contracts, and international portfolio selection, Journal of Finance43, 197-215.French, K., and J. Poterba, 1991, Investor diversification and internationalequity markets,American Economic Review81, 222-226.

Documents

FM300 Syllabus Section a 2012-13